Finance
Why you should know how to calculate your Net Worth
Table of Contents
Did you ever calculate what you would get if you sold all your possessions, took all your savings, and paid all your debts?
Are you alarmed when you discover that your assets are smaller than your liabilities (debts)?
What is the maximum amount of time you could live on this money (theoretically speaking)? This is how you calculate your net worth.
Your net worth is the amount you would have if all your assets were sold, and all your debts paid off.
It is vital to determine your net worth to assess your financial situation and be able to establish your financial goals over the long and short term.
The following will provide a detailed explanation about net worth, how it is calculated and how it can be helpful to you.
Net worth can be used to determine your financial status and the difference between your assets, and your debts.
Here’s how to calculate:
Net worth = Assets – Debts
Assets
This category includes money in cash, accounts, and deposits as well as assets like houses, cars, pensions, and emergency funds.
Debt
You can have debts such as student loans, mortgages, car loans, mortgages, or money owed to relatives. You also may have loan applications. You must repay everything they have lent you.
A step-by-step method to calculate your net worth
These steps will allow you to quickly calculate your net worth.
Step 1: Calculate your total assets value
You need to know the current sale price of assets to calculate their value.
It doesn’t matter what price you paid for each one, but how current their selling value is.
It is simple to see how much money your bank has – all you need to do is check your balance on your phone. Or go to your bank. It is difficult to determine the current value of your house.
It is important to value your assets objectively and not overvalue them. Because you are emotionally connected to your property, it is easy to want to increase its value.
When valuing assets, be conservative as possible. To determine the exact value of your home, compare it with similar properties in your area or consult a qualified realty professional to help you calculate realistic equity.
How do you calculate your assets?
Begin by looking at how much money you have in cash, and in bank accounts.
You can also add money from investments, insurance, retirement funds, and any money you can redeem at any time.
Next, determine the value of all your real estate properties. These include those you use personally and those you own as investments.
Calculate the value of your personal luxuries, such as your car, fashion items, and gadgets.
Step 2: Calculate your liabilities’ value
Once you have calculated your assets, it is time to begin collecting information about liabilities. It is much easier to calculate the value of your liabilities. You can ask for information about how much money you will need to pay your bank loans.
Take a look at all your debts and calculate how much you will need to pay off your personal and mortgage loans.
Do not forget about the loans that you received from family and friends. It is essential to write down all information you need to return.
Step 3: Calculate the value of your net worth
The formula, as mentioned above, is a subtraction from your assets of your liabilities.
Positive means you have more assets than your liabilities. Your net worth is also positive. This means that you can pay off your debts using what you already own.
Negative assets are a sign that you have more debts than what you own. Your net worth is also negative.
Why it is important to know your net worth
Many people believe that only wealthy people need to know their net worth. It is false! If you are serious about your financial life, it is important to know your net worth.
Generally, you should review your net worth statements over time to confront the reality of your financial situation. This helps you to determine where you are now and where you want it to go.
It can also encourage you to move in the right direction, i.e. it can encourage you to reduce your debts and increase your assets, or it can flag you down if you aren’t on the right path.
These are the steps to get you on track:
Spend wisely
It is vital to know your net worth. This will help you spot areas where you spend too much. You don’t have to buy something just because you can afford it.
Avoid unnecessary debt by asking yourself whether you really need it or not before you purchase it. Your needs should dictate most of your expenses. This will help reduce unnecessary debt and expenses. You can’t mistake a desire for a need.
Getting out of debt
A review of your assets and liabilities will help you to create a plan for repaying debt.
Many people mistakenly confuse income with wealth. Even if you make a lot of money but have little in savings and a lot of debt, you may be poor financially.
Your colleague at work might give the impression that he is wealthy and well-off because he has a beautiful house, takes frequent vacations, and drives a luxurious car. This doesn’t necessarily mean anything if he is in debt. He isn’t rich; he’s indebted.
Your net worth can help you see the bigger picture and give you some insight into your financial situation. You can also quickly find a solution if you realize you have more debts.
Save and invest
Your net worth can be a motivator to save money and invest. Your net worth can be a motivator to help you keep moving forward.
If your net worth is increasing, this could motivate you to take a more aggressive approach to saving and investing.
Keeping your net worth up to date
This calculation should be done regularly. It is best to do this calculation once a year, and once a quarter.
It is important to know that different items have varying values. The value of real estate, stocks, currencies, and other investments changes constantly. It is possible that the money you invested five years ago might not be as much today if it was sold.
It is therefore important to keep track of the value of your possessions so that you can make informed decisions. You can use the Prillionaires personal finance software to keep track of all your assets and liabilities easily.
Conclusion
It is not enough to know how to calculate your net value. To track the changes in your net worth over time, make sure you do this regularly. Don’t compare your net worth to another person’s.
If you don’t have a calculator, I would love it if you took a few minutes to calculate your net worth. This will reveal the truth about your financial situation.
Manuela Willbold
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